Question

Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2 : 2 :1 respectively. Their balance sheet as on March 31, 2007 was as follow

$\begin{array}{ccccccc}& & & & & & \\ & & & & \text{Balance Sheet}& & \\ \text{Dr}& & & & \text{as on March 31, 2007}& & \text{Cr}\end{array}\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Amt.(Rs)}& \text{Assets}& & \text{Amt.(Rs)}\\ \text{Sundry Creditors}& & \text{1,00,000}& \text{Cash at Bank}& & \text{20,000}\\ \text{Capital Accounts}& & & \text{Stock}& & \text{30,000}\\ \text{Puneet}& \text{60,000}& & \text{Sundry Debtors}& & \text{80,000}\\ \text{Pankaj}& \text{1,00,000}& & \text{Investments}& & \text{70,000}\\ \text{Pammy}& \underset{–}{40,000}& \text{2,00,000}& \text{Furniture}& & \text{35,000}\\ \text{Reserve}& & \text{50,000}& \text{Buildings}& & \text{1,15,000}\\ & & \overline{\underset{–}{\underset{–}{3,50,000}}}& & & \overline{\underset{–}{\underset{–}{3,50,000}}}\end{array}$

Mr Pammy died on September 30, 2007. The partnership deed piovided the following

(i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year's profit.

(ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years' purchase of average of last 4 years profit. The profits for the last four financial years are given below for 2003-04; Rs. 80,000; for 2004-05, Rs. 50,000; for 2005-06, Rs. 40,000; for 2006-07, Rs. 30,000. The drawings of the deceased partner up to the date of death amounted to Rs. 10,000. Interest on capital is to be allowed at 12% per annum.

Surviving partners agreed that Rs. 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% pa on outstanding balance. Show Mr Pammy's capital account, his executor's account till the settlement of the amount due.

Answer 1

$\begin{array}{ccccccc}& & & & & & \\ \text{Dr}& & & & \text{Pammy's Capital Account}& & \text{Cr}\end{array}\begin{array}{cccccc}\text{Particulars}& & \text{Amt.(Rs)}& \text{Particulars}& & \text{Amt.(Rs)}\\ \text{Drawings A/c}& & \text{10,000}& \text{Balance b/d}& & \text{40,000}\\ \text{Pammy Executor's A/c}& & \text{75,400}& \text{Profit and Loss A/c (Suspense)}& & \text{3,000}\\ & & & \text{Puneet's Capital A/c (goodwill)}& & \text{15,000}\\ & & & \text{Pankaj's Capital A/c (goodwill)}& & \text{15,000}\\ & & & \text{Interest on Capital A/c (6 months)}& & \text{2,400}\\ & & & \text{Reserve}& & \text{10,000}\\ & & \overline{\underset{–}{\underset{–}{85,400}}}& & & \overline{\underset{–}{\underset{–}{85,400}}}\end{array}$

$\begin{array}{ccccccc}& & & & & & \\ \text{Dr}& & & & \text{Pammy's Executor's Account}& & \text{Cr}\end{array}\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2003-04& & & & 2003-04& & & \\ \text{Sep 30}& \text{Bank A/c}& & 15,400& \text{Sep 30}& \text{Pammy's A/c}& & 75,400\\ & & & & & \text{Capital A/c}& & \\ \text{Mar 31}& \text{Balance c/d}& & 63,600& \text{Mar 31}& \text{Interest A/c}& & 3,600\\ & & & \overline{\underset{–}{\underset{–}{79,000}}}& & & & \overline{\underset{–}{\underset{–}{79,000}}}\\ 2004-05& & & & 2004-05& & & \\ \text{Sep 30}& \text{Bank A/c}& & 22,200& \text{Apr 1}& \text{Balance b/d}& & 63,600\\ & (15,000+3,600+3,600)& & & \text{Sep 30}& \text{Interest A/c}& & 3,600\\ \text{Mar 31}& \text{Balance c/d}& & 47,700& \text{Mar 31}& \text{Interest A/c}& & 2,700\\ & & & \overline{\underset{–}{\underset{–}{69,900}}}& & & & \overline{\underset{–}{\underset{–}{69,900}}}\\ 2005-06& & & & 2005-06& & & \\ \text{Set 30}& \text{Bank A/c}& & \text{20,400}& \text{Apr 01}& \text{Balance b/d}& & \text{47,700}\\ & (15,000+2,700+2,700)& & & \text{Sep 30}& \text{Interest A/c}& & 2,700\\ \text{Mar 31}& \text{Balance c/d}& & \text{31,800}& \text{Mar 31}& \text{Interest A/c}& & \text{1,800}\\ & & & \overline{\underset{–}{\underset{–}{52,200}}}& & & & \overline{\underset{–}{\underset{–}{52,200}}}\\ 2006-07& & & & 2006-07& & & \\ \text{Set 30}& \text{Bank A/c}& & \text{18,600}& \text{Apr 01}& \text{Balance b/d}& & \text{31,800}\\ & (15,000+1,800+1,800)& & & \text{Sep 30}& \text{Interest A/c}& & 1,800\\ \text{Mar 31}& \text{Balance c/d}& & \text{15,900}& \text{Mar 31}& \text{Interest A/c}& & \text{900}\\ & & & \overline{\underset{–}{\underset{–}{34,500}}}& & & & \overline{\underset{–}{\underset{–}{34,500}}}\\ 2007-08& & & & 2007-08& & & \\ \text{Sep 30}& \text{Bank A/c}& & \text{16,800}& \text{Apr 01}& \text{Balance b/d}& & \text{15,900}\\ & (15,000+900+900)& & & \text{Sep 30}& \text{Interest A/c}& & 900\\ & & & \overline{\underset{–}{\underset{–}{16,800}}}& & & & \overline{\underset{–}{\underset{–}{16,800}}}\end{array}$

Working Note
(i) Pammy's share of profit = Previous year's profit $\times$ Period till date of death $\times$ Deceased partner's share
=$30,000\times \frac{6}{12}\times \frac{1}{5}$= Rs. 3,000

(ii) Pammy's share of goodwill = Firm's goodwill $\times$ Deceased partner's share
Firm's goodwill = Average profit $\times$ Number of purchase years.
=$\frac{80,000+50,000+40,000+30,000}{4}\times 3$
=$\frac{2,00,000}{4}\times 3=50,000\times 3$ = Rs. 1,50,000
Deceased partner's share = $1,50,000\times \frac{1}{5}$= Rs. 30,000

(iii) Gaining Ratio If no information is given, old ratio of remaining partners is considered as gaining ratio. Thus, here gaining ratio is 2:2 or 1:1

(iv) Contribution of remaining partners for deceased
partner's goodwill = Puneet $\Rightarrow 30,000\times \frac{1}{2}$= Rs. 15,000

(v) Calculation of Instalments Amount Due to Pammy's Executor after paying some amount in cash was Rs.60,000 (= 75,400-15,400) divided in 4 equal instalments (i.e.$\frac{60,000}{4}$= Rs. 15,000 each).

(vi) Calculation of Interest

$\begin{array}{cccc}\text{Year}& \text{Amount Due}& \text{Duration}& \text{Interest}\\ 2003-04& 60,000& \text{6 Months}& 3,600\\ 2004-05& 60,000& \text{6 Months}& 3,600\\ & 45,000& \text{6 Months}& 2,700\\ 2005-06& 45,000& \text{6 Months}& 2,700\\ & 30,000& \text{6 Months}& 1,800\\ 2006-07& 30,000& \text{6 Months}& 1,800\\ & 15,000& \text{6 Months}& 900\\ 2007-08& 15,000& \text{6 Months}& 900\end{array}$